Strony

"Market watchers have long griped about companies
that try to bury their bad news by releasing it late on a Friday afternoon. Earnings
shortfalls, product recalls, outlandish severance deals—these things always
seem to hit the wires just as we’re kicking off our pumps and wingtips for the
weekend. The website Footnoted even runs a regular feature called the Friday Night
Dump, in which it combs through end-of-the-week SEC FILINGSfor dirty laundry.

But does this old PR
trick even work in a world of 24/7 news services and social media? Not when it
comes to earnings announcements, according to a working paper by Stanford
Graduate School of Business accounting professor Ed deHaan and colleagues. In
fact, by one measure, Friday filings might even get a little extra
scrutiny—presumably the opposite of what those companies were hoping for."

"The economic collapse in the wake of the global
financial crises (GFC) and the weaker-than-expected recovery in many countries
have led to questions about the impact of severe downturns on economic
potential. Indeed, for several major economies, the level of output is nowhere
near returning to pre-crisis trend (figure 1). Such developments have resulted
in repeated downward revisions to estimates of potential output by private- and
public-sector forecasters. In addition, this disappointment in post-recession
growth has contributed to concerns that the U.S. economy, among others, is
entering an era of secular stagnation. However, the historical experience of
advanced economies around recessions indicates that the current experience is
less unusual than one might think. First, output typically does not return to
pre-crisis trend following recessions, especially deep ones. Second, in
response, forecasters repeatedly revise down measures of trend."

"This paper uncovers strong return reversals in
stock market returns around the last monthly settlement day, T-3, which
guarantees liquidity for month-end cash distributions. We show that these
return reversals are stronger in countries where the mutual fund ownership is
large, and that in the US the return reversals have become stronger over time
as the mutual fund ownership of stocks has increased. Finally, in the
cross-section of stocks, the reversals around turn of the month are stronger
for stocks more commonly held by mutual funds, for liquid stocks, and for more
volatile stocks (controlling for liquidity)."

"Never pick a fight with a central bank. The only one who gets hurt is you. Unless, of course, you
are another central bank."

"So it is not quite true that a currency-issuing
central bank has no opponents. No-one in the private
sector will oppose it, unless they have a deathwish. But other currency-issuing
central banks might, if they perceive its actions as threatening to their own
economies. "

"Why is the Shiller CAPE so high? In the
last several weeks, a number of prominent academics and financial market
commentators have attempted to answer this question, to include the inventor of
the valuation measure himself, Nobel Laureate Robert Shiller. In this
piece, I’m going to attempt to give a clear answer.

The piece has five parts:

·In the first part, I’m going to explain why valuations in general are
higher than they have been historically. It’s not just the CAPE that’s
historically elevated; the simple TTM P/E ratio is also historically
elevated, by a reasonably large amount.

·In the second part, I’m going to highlight the main reason that the
Shiller CAPE has risen relative to the simple TTM P/E over the last two
decades: high real EPS growth. I’m going to introduce a schematic that
intuitively illustrates why high real EPS growth produces a high Shiller CAPE.

·In the third part, I’m going to explain how reductions in the dividend
payout ratio have contributed to high real EPS growth. In discussing the
dividend payout ratio, I’m going to present a different, potentially more
accurate formulation of the Shiller CAPE, a formulation that conducts the
calculation based on total return instead of price. On
this formulation, the Shiller CAPE falls by around 10%, from 26.0 to 23.5.

·In the fourth part, I’m going to explain how a secular uptrend in profit
margins has contributed to high real EPS growth over the last two decades.
This effect is the most powerful of all, and is the main reason
why the Shiller CAPE and the TTM P/E have diverged in their valuation signals.

·In the fifth part, I’m going to outline a set of possible future return
scenarios that investors at current valuations can reasonably expect. I’m
then going to identify the future return scenario that I find most credible."

"So
the idea must be that the presence of the ECB in the SME ABS market would spur
loan issuance. To make a significant difference to credit conditions in the
periphery and repair the broken monetary policy transmission mechanism, that
loan issuance would have to be simply huge and concentrated in periphery
countries. There are several problems with this, to my mind.

Firstly,it
makes a huge assumption about the scale of potential demand for credit in the
periphery from creditworthy SMEs. Is discouraged demand really that huge - or
is there actually a problem with the creditworthiness of potential borrowers,
because of the widespread destruction of physical and human capital in the
periphery? Distressed corporate loans in the peripheryare far higherthan in the core. That's
why spreads are so high. Why would an SME ABS programme
improve the creditworthiness of borrowers?"

"Mario Draghi'sspeech at Jackson Holeon August 22nd caused a considerable stir. For the first
time, he admitted that the absence of a central bank backstop for government
borrowing means both higher borrowing costs for governments and a greater
likelihood of market punishment for profligate governments (...)."

"And the consequences of
this shocking waste of human capital could be serious. Highly-indebted
governments in the Eurozone depend on high tax revenues in the future to reduce
their debt burdens: while even less heavily indebted governments such as
Germany will also need high tax revenues in the future to support their increasing
proportion of elderly. The future fiscal sustainability of the Eurozone depends
on the young people whose futures are currently being systematically destroyed
by unemployment. THIS is what Draghi's speech is about."

"For critics of
mainstream economics, the 2008 financial crisis represents the final nail in
the coffin for a paradigm that should have died decades ago. Not only did
economists fail to see it coming, they can’t agree on how to get past it and
they have yet to produce a model that can understand it fully. Anumberofbookscriticalofeconomics have
been written or re-written with the crisis in mind; articles by journalistsandcritical economists are
keen to use the crisis as evidence of the fields failings; and that
student-led anti-economics initiatives call themselves things like
the 'Post-Crash Economics Society' speaks
for itself.

However, economists
tend to see things differently – in my experience, your average economist
will concede that although the crisis is a challenge, it’s a challenge that has
limited implications for the field as a whole. Some go even further and argue
that it is all but irrelevant, whether due to progress being made in the field
or because the crisis represents a fundamentally unforeseeable event in a
complex world. Below I have
compiled the 7 most common arguments used to defend economic
theory after the crisis, and will consider each of them in turn, with the
quality of the arguments increasing as we go further down the list."

"The argument that the creation of the BRICS Bank could
make a significant difference to the global financial architecture should not
be pushed too far. In the final analysis development banks are instruments of
state capitalist development. Such specialised institutions are needed because
of the shortfalls in the availability of long-term finance for
capital-intensive projects in market economies, resulting from the maturity and
liquidity mismatches involved. Resources mobilised are from those wanting shorter
maturities and greater liquidity, and sums lent are to projects that are large
and illiquid with long gestations lags and long-term profit profiles."

"Whether even this
difference would be material depends on three factors. The first is the degree to which the
emergence of the NDB alters the global financial architecture and perhaps,
therefore, the behaviour of the institutions currently populating it. The
second is the degree to which the BRICS bank can differ in its lending
practices from the institutions that currently dominate the global
development-banking infrastructure. And, the third is the degree to which a
development bank set up as a tool of state-guided development by governments in
countries pursuing capitalist and even neoliberal development trajectories can
indeed contribute to furthering goals of more equitable and sustainable
development."

"For years
economists have debated whether destructive storms are even bad for a country's
economy. To a
non-economist, the ill effects of a storm might seem intuitive, but economists
have a knack for finding plausible counterintuitive explanations."

"Hsiang and Jina looked at 6,712 cyclones, typhoons,
and hurricanes observed from 1950 to 2008 and the economic fortunes of the
countries they struck in the years that followed. With their data, Jina and
Hsiang can decisively say: These storms are bad—very bad—for economic growth."

"The
effects are lasting: Overall, they find that "each additional meter per
second of annual nationally-averaged wind exposure lowers per capita economic
output 0.37 percent20 years later" (emphasis
added). Put simply, economies "do not recover in the long run."

Cash at
his Omaha, Nebraska-based Berkshire Hathaway Inc.
(BRK/A) rose past $50 billion at the end of June, the first time it
finished a quarter above that level since he became chairman and chief
executive officer more than four decades ago."

"I
have been going through BancoEspíritoSanto'shalf-year 2014 results. They make pretty grim reading. No, actually it's worse
than that. They read like an instruction manual on how to rip off a bank.

I can't work out if the BES management at the time was
stupid, naïve, complacent or criminal. Probably all four. No matter – it has
now been entirely replaced. Well, I say “no matter” - but actually such abysmal
management DOES matter. Those responsible for audit, risk and compliance have
been guilty of incompetence so gross it borders on the criminal. And the former
CEO and vice-chairman, RicardoEspíritoSanto Salgardo – a member of theEspíritoSanto family –has been arrestedon suspicion of money laundering and tax
evasion. But I suspect he has done more than that: he was also chairman of
ESFG, which – as will become apparent shortly – systematically drained the bank
and its other subsidiaries. If he didn't know what was going on, he was
incompetent: if he did, then he was a party to corruption and fraud on a simply
massive scale. Exactly how massive is not yet clear. But I think we are talking
billions of Euros."

"Commercial
banks areslowly dying. The
activities that were formerly profitable are either illegal, immoral or simply
not profitable any more. And the core activities that society wants and needs
are also unprofitable, at least if they are done in the way that society has
come to expect – free-while-in-credit transaction accounts, inflation-level
interest on deposits, fixed low margins on lending. Meanwhile, commercial banks
face stiff competition from new competitors – not new banks, though there are
some of these, mostly backed by large retail organisations – but an astonishing
and ever-increasing range of mostly internet or phone-based providers of
deposit-taking, lending and payments services. Unlike the new providers, banks
are having to meet higher capital and liquidity requirements and comply with
tighter regulations, while suffering margin squeeze because of low interest
rates and a continual drain of dissatisfied customers. And they are still
facing legal costs and fines for their past misbehaviour. It's a very tough
world for banks at the moment.

And they are paying the price. The big investment banks arealready breaking themselves up, and
they will be followed in due course by the big universal and retail banks. What
has not been achieved through regulation may yet be achieved through market
forces."

"During the 1997–98 Asian financial crisis, when
middle-income countries were hard hit by big capital outflows, there was an
effort by China, Japan, Taiwan and other countries to put together an Asian
Monetary Fund to offer balance of payments support.Washington vetoed the idea, insisting that all assistance had to go
through the International Monetary Fund. Theresult was a mess, including an
unnecessarily deep regional recession, as the IMF failed to act as a lender of
last resort and then attached all kinds of harmful and unnecessary conditions to its lending.

But
the world has changed a lot in the past 15 years. Last week the BRICS countries
(Brazil, Russia, India, China and South Africa) decided to form the Contingent
Reserve Arrangement (CRA) and the New Development Bank (NDB), and the United
States will not have a veto this time. These new
institutions could mark a turning point for the international financial
system."

"The
question stems from lengthy (256 page PDF) from theBIS Annual Report(Bank for International Settlements) that stated among
other things "The only source of lasting prosperity is a stronger
supply side. It
is essential to move away from debt as the main engine of growth."

The BIS
slammed the Fed in numerous places and in numerous ways, especially regarding
the Fed's reliance on QE."

"30.
Policy
responses matter too. Central banks find it difficult to operate with policy
rates that are considerably different from those prevailing in the key
currencies, especially the US dollar. Concerns with exchange rate overshooting
and capital inflows make them reluctant to accept large and possibly volatile
interest rate differentials, which contributes to highly correlated short-term
interest rate movements. Indeed, the evidence is growing that US policy rates
significantly influence policy rates elsewhere. Very low interest rates in the
major advanced economies thus pose a dilemma for other central banks. On the
one hand, tying domestic policy rates to the very low rates abroad helps
mitigate currency appreciation and capital inflows. On the other hand, it may
also fuel domestic financial booms and hence encourage the build-up of
vulnerabilities. Indeed, there is evidence that those
countries in which policy rates have been lower relative to traditional
benchmarks, which take account of output and inflation developments, have also
seen the strongest credit booms."

"As the Eurozone cautiously implements stabilising
reforms, Germany is forced to go further with concessions than it would prefer.
This
column suggests that it would be beneficial for discontented members to
consider the formation of a second monetary union. The second euro can be
constructed better than the first, bringing the discontented members
exchange-rate adjustments relative to Germany, and avoiding competitive
devaluations."

"A repeated question about the Eurozone is whether the
members form an optimal currency area. But another question – which is actually
closer to Mundell’s original contribution (Mundell 1961) – is whether the right
number of currencies in the Eurozone is as high as 18, the number of member
countries in the system. If the right number is neither 1 nor 18, then 2 may be
far, far better than either extreme.

Let me begin by
recalling the reasons why 18 would be too many. First, some of the members are probably small enough to have
no scope for using monetary or exchange rate policy as a tool of economic
stabilisation over the business cycle (McKinnon 1963). Next, the 18 members do
form an economically integrated group of geographical neighbours, and therefore
their mutual efforts to use monetary and exchange rate policy to their
advantage could easily lead them to enter into non-cooperative games with
costly Nash consequences. Finally, national monetary policy can mean
Treasury-dominated monetary policy, which can lead to very poor outcomes apart
from strategic games with any foreigners, near and far."

"The American financial establishment has an incredible ability to
celebrate the inconsequential while ignoring the vital. Last week, while
the Wall Street Journal pondered
how the Fed may set interest rates three to four years in the future (an
exercise that David Stockman rightly compared to debating how many angels could
dance on the head of a pin), the media almost completely ignored one of the
most chilling pieces of financial news that I have ever seen. According to a
small story in the Financial Times,
some Fed officials would like to require retail owners of bond mutual funds to
pay an "exit fee" to liquidate their positions. Come again? That such
a policy would even be considered tells us much about the current fragility of
our bond market and the collective insanity of layers of unnecessary
regulation."

"The
Federal Reserve can keep their balance sheet at the current size (and keep the
risk asset party going) or it can position itself to be able to hike
rates — but it cannot do both."

"It’s
often mentioned that the Fed buys bonds in asset swaps. This is true. Where
many people get confused is that it is not an asset swap for the banks. When
the Fed buys bonds, they typically buy them from non-banks. The bonds are
removed from circulation and put on the Fed’s balance sheet, while the Fed pays
for these bonds with newly created reserves. Now these reserves must be
deposited at a bank, so they will show up at a bank as new deposits."

"By "loan demand", we usually mean the demand
from households and corporations for the credit provided by banks. But actually
this makes no sense. What households and corporations actually want is not
loans. It is money.

Households that have
money generally do not borrow. They buy their houses, cars, yachts, holidays to Bermuda with money they
already have. It is households that DON'T have money that borrow. They do so in
order to buy the houses, cars, holidays to Ibiza (perhaps not yachts so much)
that they don't have the money to afford. They would really like to buy these
things from money they already have, but there isn't enough of it right now,
and in the case of houses there won't be for at least 25 years even if they
save assiduously. They do not "want" loans. They want money."

"Loan assets are claims on the future income of households, corporations
and governments. Lending is always a bit of a gamble: future income is by
definition uncertain. Default happens when income in reality does not match the
expectations against which the loan was advanced. The interest payments on a
loan are both compensation for the opportunity cost to the lender of not using
the money (although in the case of banks which create money when they lend, the
existence of this opportunity cost is debateable) and, more importantly, a
consideration or surety against possible future default. The higher the
likelihood of future default, the higher the interest payments."

"It seems unlikely that the ECB is unaware of the effect of
negative rates on Danish lending volumes. So despite
extensive comments in the media about negative rates encouraging banks to lend,
I doubt if that is the real purpose. Indeed, asM3lending
figures for the Eurozone actuallyimproved slightly in April, it is hard to see why the ECB
would act now when it did not earlier this year.

So I don’t
think this is about bank lending at all. I think it is about German disinflation and the exchange value of the
Euro."

"The recent public
outcry over high frequency trading is pointless. Solutions exist. Virtually every
comparable market in the world uses them already.

But, some electronic exchanges may not willingly adopt them.
Doing so may disrupt their current business model. The incentives are
misaligned, and competitors or regulators may need to force the issue to see
change. Luckily, the issue to be forced is far simpler than most think.

It’s time to add quality to the matching process. Over
thousands of years, every naturally evolved market has headed this direction –
from the ancient Greeks to Alibaba.com. It’s time for Wall Street to realize
what they lost along the way, and how it can fix far more than just HFT."

"“Inflation”, said Milton Friedman, “is always and everywhere a monetary
phenomenon”. Upon this statement has been built three decades of faith in the
omnipotence of central banks. It does not matter what government does: it does
not matter what markets do: it does not matter what shocks there are to the
economy. As long as central banks get the money supply right, there will be no
inflation. Or deflation. Growth will simply proceed smoothly along a
pre-determined path.

Leaving
aside the question of whether central banks really control the money supply at
all in an endogenous fiat money system, it is clear to me that the control of
inflation – in all its forms – is by no means so simple. Despite Friedman’s
statement, the forces that create inflation and deflation are in reality poorly
understood."

"That headline makes quite a
statement. But it’s
true. The stock of so-called “financial capital,” or wealth — all the financial
assets out there, which are ultimately claims on real capital — represents only the
most tenuous long-term approximation of what our real capital is worth.

Certainly
true: the stock (total dollar value) of “financial capital” goes up (in fits,
starts, and reverses) over the decades as real capital is accumulated. But
beyond that rough, big-picture relationship, the total value of financial
assets tells us very little about the total value of real assets.

"There's more than one oil price around the world and as the following
comprehensive (but brief) overview from Morgan Stanley's Global Energy Teach In
shows,crude oil pricing across the world is dynamic
and multi-factorial - from fundamental factors (such as simple
supply and demand and seasonality) to macro factors (such as USD strength,
macro sentiment, and "burden") and risk premia (e.g. geopolitics),
the following provides everything you wanted to know about global crude oil
fundamentals, but were afraid to ask..."

Although everyone knew Deutsche
Bank was short of capital, this admission is nevertheless somewhat embarrassing.
Only last year, Deutsche Bankraised3bn
EUR with a rights issue and claimed that no further capital would be needed."

"To me, Deutsche Bank looks very much like the archetypal “too big to
fail” zombie bank – draining money from central banks, sovereigns and investors
while giving little in the way of returns. The question is for how long
investors will be willing to put up with poor returns and repeated demands for
more money – for if anyone thinks this is the last of Deutsche Bank’s capital
raising, I fear they are very much mistaken. Though admittedly it is far from
being the only European bank in this condition. European banks generally are in
poor shape. It is to be hoped that the ECB’s stress tests will encourage them
to put their houses in order."

"The modern private equity industry got its start in 1979 when, for
the first time, a large, publicly traded company was taken private in a
leveraged buyout. For the next 30 plus years, the
industry escaped regulatory oversight by the Securities and Exchange Commission
(SEC) by adopting complex and opaque organizational structures designed for
that purpose. That changed with the passage of the Dodd-Frank Wall Street
Reform and Consumer Protection Act in the wake of the recent financial crisis.
Since 2012 most mid-size and large private equity funds have been required to
disclose their activities to the SEC. Last week reports of what the SEC found
began to leak out.

Staff at the SEC has reviewed
about 400 private equity funds. What did they learn?"

"In 2013 Greek taxpayers borrowed from the
rest of Europe’s taxpayers €41 billion to pump into the Greek banks. This is well known. What isnotknown is that, also in 2013/4, the Greek banks received an
additional, well hidden, €41 billion bailout loan from Greek and European
citizens. This bailout was never authorised
by any Parliament or even discussed in public anywhere in Europe.

This is how it worked:Bank X would lend money to… itself. It would do this by issuing
a bond which it did not intend to sell. So, why issue such a phantom
bond? Why write an IOU and give it to one’s self? The answer is: In order to
hand this phantom bond over to the European Central Bank as collateral in
exchange for a cash loan. Normally, of course, the ECB would never
accept such a phantom bond as collateral. Accepting it would have
been to accept a loan it gave to Bank X as collateral for the said loan. It
would have been an assault on the meaning of collateral and a gross violation of
the ECB’s rulebook. So, bank X, knowing this, took its phantom bond
first to the Greek government and had it guarantee it. With the government’s
guarantee stamped on it, the ECB then accepted Bank X’s phantom bond and handed
over the cash. Why? Because the Greek taxpayer had, in the meantime, unknowingly provided
the collateral for Bank X’s loan."